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News | 2.4.26

Expanding the Opportunity Set for “High Yield” Investing
Expanding the Opportunity Set for “High Yield” Investing
February 4, 2026 • Bill Hortz

[The capital structures of companies in the high yield universe have expanded greatly from traditional high yield bonds to an array of alternative financing solutions that include bank loans and private credit.

Regardless of the growth of these various credit instruments, it remains a cyclical asset class with spreads widening/tightening based on market fundamentals and idiosyncratic issues around capital structures; therein providing an enhanced opportunity set for income investors.

To better understand how the growth of the alternative credit markets expands opportunities for high yield investors, we were introduced to Donald E. Morgan, Managing Partner & Chief Investment Officer and Doug Pardon, Co-Chief Investment Officer of  Brigade Capital Management- a global alternative asset management firm, founded in 2006, that employs a multi-strategy, multi-asset class approach to investing across the broad credit universe. They have been developing best-in-breed credit expertise in fundamental corporate and alternative credits with a proven, cycle-tested active investment process to deliver risk-adjusted returns aligned to client needs.

We asked them questions to better understand their perspectives on the global credit universe, their Brigade High Income Fund (BHIIX), and their research and portfolio construction process utilizing credit rotation across the full high yield capital structure.]
 

 
Hortz: Can you give us a brief overview of the high yield investment universe and some of the different investment areas that you are working with?

Morgan: When most people think about the high yield universe, they are thinking about corporate high yield bonds. That asset class is a trillion dollars plus marketplace comprised largely of unsecured fixed-rate bonds that historically financed leveraged buyouts. That is still the core of what many fund managers focus on.

Throughout our careers, Doug, the team, and I have looked at the entire capital structure of companies which gives us a broader perspective on what we call “opportunistic” or “multi-asset credit”. It has increasingly been known as the alternative credit space where a broadly syndicated loan market has developed. These are typically first lien but are sometimes second lien. These securities tend to be floating rate with five to seven years in maturity and attractive yield

Pardon: We also have a large, structured credit team that has actively involved in the development of the collateralized loan obligations (CLO) market over the last 15 or 20 years. These are structured vehicles that purchase broadly syndicated loans and are structured to fund those investments through the issuance of debt. There are BBB and BB portions of CLOs that would be part of our universe.

Other areas include preferred stocks, busted convertible bonds, and stressed and distressed debt. We are looking for risk-adjusted opportunities across a very broad universe of higher yielding securities that are generally sub-investment grade.
 

 
Hortz: How would you describe your fixed-income multi-strategy and multi-asset class investment style and methodology?

Morgan:  Our high yield strategy allows us to opportunistically invest into the below-investment grade asset classes we just mentioned. Within these asset classes, we have a multi-sector approach driven by our research team. Our analysts cover different industries and sectors searching across the full spectrum of high yield credit for risk-adjusted opportunities that we believe offer much better relative value.

We also employ a bottom-up strategy. The research team is looking at individual companies and modeling them. Even in “bad” sectors, there can still be good ideas discovered from a bottom-up perspective. By analyzing these asset classes and industries, and then employing bottom-up research, we develop a large set of ideas and opportunities that we focus on. From there, we narrow down this universe based on the best risk/reward opportunities. The full focus is to protect principal by having a “margin of safety” for downside protection. Beyond that, we are looking to maximize the yield while also seeking total return.

Pardon: Additionally, we have a top-down macro and tactical twist to our multi-strategy approach. You will find that these asset classes are cyclical and experience opportunistic events. Something will happen in the economy - there will be a recession, credit spreads will widen and the asset class can experience high volatility in those periods, or there will be some sort of financial crisis over a shorter period of time that will cause spreads to blow out.

When credit spreads are wide, we feel like the market's offering you a lot of “fat pitches”. We will actively move down in credit quality focusing on weaker B and CCC* securities primarily within the high yield bond universe.

Conversely, when credit spreads are tight, we will tend to lean into some of these other asset classes where we would be looking for alternative opportunities, including bank loans, and upgrade the credit quality of the portfolio by focusing on stronger B or BB securities to maximize liquidity.
 
 

 
Hortz: Can you explain some of the key alternative credit areas you follow and how do you opportunistically manage these different sectors to add income and growth to portfolios?

Morgan: There are inefficiencies in all asset classes, including these other high yield investment areas. What we are always looking for is when they are offering much better relative value or when, for whatever reason, we have a significant advantage over our competitors. For instance, we have exposure to busted convertible bonds and have the flexibility to opportunistically increase that exposure when we see attractive value. If you think about a convertible bond, most are issued at par at a time when people are optimistic about the company's stock price.  Over time, if that stock has traded down for whatever reason - missed earnings, industry fundamentals - these bonds, because they are highly sensitive to the stock price, will trade down and hit what is referred to as a bond floor. They tend to have 2% - 3% coupons, which means this bond floor can be 75-80 cents on the dollar.

Now you have a security that is not very sensitive to the underlying equity. It's got a low current yield because the coupon is low, but an attractive yield to worst due to the lower dollar price.  If that bond trades from the eighties to par, you are going to have a high total return on that security. We will look at those credits and value them. If we feel that there is particularly good asset coverage and downside protection, we will step in.

The convertible bond market basically becomes an inefficient market in the sense that there are not a lot of people focused on this universe. The convertible arbitrage funds have gotten out of these securities. A convertible mutual fund wants more equity sensitivity. This is sort of an unloved security within a small asset class.

Pardon: On the CLO side, if you buy a broadly syndicated loan at SOFR+300 basis points (“bps”), you are usually facing a single individual issuer, and the outcome of that investment is going to be solely focused on how that issuer performs. Conversely, in the CLO market that issues BB or BBB* securities, a lot of these securities are bought by hedge funds or levered vehicles, and in periods of market volatility, you will see sellers of CLO debt out of these vehicles.

When volatility forces levered players to sell, we will be step in and buy a BBB CLO at a spread that is wider than the overall underlying issuers of the broadly syndicated loan market. So you can own a BBB bond of a CLO that owns 400 different issuers versus an individual issuer loan where you are facing that single company. And the only way to really have realized losses on that investment is if 10% of the portfolio defaults year after year, which is highly unlikely. In those types of environments, the inefficiency arises because there are more sellers and illiquidity. We can step in and, from a relative value perspective, do so at a higher spread in these securities than individual loans with much better downside protection.

We will also look at preferreds. Recently there was a financial institution that wanted to issue preferreds to raise regulatory capital. Preferreds can pay dividends, in kind or in cash, but we structured this preferred 5% wider in yield than their underlying unsecured bonds. We also put a feature in where there would have to be a minimum level of high cash interest. I would say that our ability to do this gives us an advantage and you are just not going to find a lot of high-yield investors that are looking at the preferred part of the market.

So those are a few of the things that we look at. We also will look at stressed municipal debt, commercial real estate or other areas, but that gives a flavor of the types of differentiated areas we can opportunistically take advantage of.
 
 

Hortz: Talk to us about the capabilities of your proprietary in-house research. How was it structured differently to compete with other researchers and be effective across the full high yield credit universe?

Morgan: One of the differentiating factors for our firm is that we have always been a partnership from day one and a lot of our research analysts are equity partners in the firm, creating one team that is growing together. I also think that the breadth of the research and the experience of our team members stack up very well against our competitors. We have 19 people on the research side with senior analysts having an average of over 20 plus years of experience, covering the same sector(s) for the majority of their careers. They have seen industry cycles and developed deep knowledge in these areas of what drives success or failure for companies within their respective industries.

The other differentiator is that the research team covers the entire capital structure of companies we are covering. Our chemical analyst is not just covering their high yield bonds but also any syndicated loans, busted convertibles, preferreds, and fielding club deals for loans looking for extra yield and growth potential. We are all working together on the High Income Fund, so we do not have separate teams within the firm. Those are some of the differentiating factors.

Pardon: We built our firm into a diversified investment business extending our high yield expertise into some of the more interesting areas of the expanding marketplace and building the stability of a broader based firm. The uniqueness of our overall organization has become an attractive place for specialized investment analysts to land and help us build our team.  With our team, an analyst has a diversified skill set having invested for many years, not only in long-only, but also as a hedge fund investor. That adds a little bit of a unique dynamic.
 
 

Hortz: How is your Brigade High Income Fund (BHIIX) strategy positioned within your broader platform, and what makes it distinct from other high income or multi-sector credit funds?

Morgan: Within our platform, this Fund is an opportunistic high yield credit fund that can expand into multi-sector and especially alternative credits. It is our only retail mutual fund across our investment platform, so for these investors it is the only way to get access to our institutional high yield investment process.

What sets this Fund apart versus the broader retail high yield mutual fund universe is the expanded high yield universe that we are open to and are actively investing in. You will see our core base of income generating high yield bonds go up or down - depending on where we are on the credit cycle – and we can increase our weightings to alternative credit markets that can help either dampen volatility, maintain high income, generate total return, or meet other investment and risk control objectives. While there are other high yield funds that have flexibility, having dynamic and purposeful access to alternative credits like structured credit, bank loans, as well as participating in club deals, allows us to have a more diversified and differentiated high yield income approach.

Another nuance of this differentiation is that most of our peer group runs incredibly diversified and one-dimensional portfolios, with hundreds and hundreds of issuers at very small weightings across the portfolio. We have a more concentrated approach, and while we are benchmark aware, we are not closet indexers by clearly being in other asset classes that are not in the broader high yield index.

Pardon: As mentioned before, we will always have a core base of high yield bonds generating income, but we will spend a lot of time thinking about where we are in a particular credit cycle and looking for where the best high yield investments appear across our expanded opportunity set. Our opportunistic, or tactical, investment approach is where we are truly most differentiated.

A lot of the larger funds in this category are highly diversified, but for the most part they may be focused on getting beta exposure to the asset class. While that is fine for some people, there is an opportunity to generate a fair bit more than that if you can have an opportunistic approach, coupled with the ability to perform deep research into alternative credits that are not as easy to find. Those two pieces are what we bring to the table.
 
 

Hortz:  What type of investor or portfolio objectives is this strategy best suited for?

Morgan: If you are an investor who seeks high income, such as retirees living on fixed income, and capital preservation. We strive to meet those objectives through sector rotation, individual bottom-up security selection of picking securities that are out-yielding the market and other asset classes where we see high current risk-adjusted returns and income. We place strong emphasis on capital preservation and maintaining a margin of safety in our investing approach.
 



*Note ratings are a calculated average of bond ratings provided by third–party rating agencies S&P, Moody’s and Fitch and range from AAA (highest) to D (lowest). Bonds with no third-party rating are designated Not Rated and do not necessarily indicate low credit quality.

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Disclaimer: This interview is for informational purposes. Nothing contained herein constitutes investment advice or the recommendation of or the offer to sell or the solicitation of an offer to buy or invest in any specific investment product or service.
 
Before investing you should carefully consider the investment’s objectives, risks, charges, and expenses. This and other information can be obtained through https://www.brigadefunds.com/resources  and/or contacting your investment advisor. Please read the prospectus and other investment documents carefully before you invest. Investing involves risk including the possible loss of principal.
 
Disclosure: Principal Risks of the Fund:
As with any mutual fund, there are risks to investing. There is no guarantee that Brigade High Income Fund (the “Fund”) will meet its investment objective. The following is a description of the principal risks of the Fund, which may adversely affect its net asset value and total return. There are other circumstances (including additional risks that are not described herein) which could prevent the Fund from achieving its investment objective. Bank Debt Risk. The Fund’s investment in secured and unsecured assignments of (or participations in) bank debt may create substantial risk. Bank debt includes interests in loans to companies or their affiliates undertaken to finance a capital restructuring or in connection with recapitalizations, acquisitions, leveraged buyouts, refinancings or other financially leveraged transactions and may include loans which are designed to provide temporary or bridge financing to a borrower pending the sale of identified assets, the arrangement of longer-term loans or the issuance and sale of debt obligations. The Fund may also invest in collateral on financial instruments, including interests on whole commercial, consumer and other loans and lease contracts. These loans, which may bear fixed or floating rates, have generally been arranged through private negotiations between a corporate borrower and one or more financial institutions, including banks. The Fund’s investment may be in the form of participations or assignments. Credit Risk: There is a risk that issuers and counterparties will not make payments on securities and other investments held by the Fund, resulting in losses to the Fund. In addition, the credit quality of fixed income securities held by the Fund may be lowered if an issuer’s financial condition changes. High yield or junk bonds as well as other debt securities issued by below investment grade issuers are typically more susceptible to these risks than debt of higher quality issuers. Furthermore, a significant amount of the Fund’s net asset value is expected to be invested in the lower- rated segment of the high yield market (rated B and below), which investments generally involve greater credit risk than high yield securities that are rated BB and above. Covenant-Lite Loan Risk: The Fund may invest in loans that are “covenant lite.” Covenant lite loans may lack financial maintenance covenants that in certain situations can allow lenders to claim a default on the loan to seek to protect the interests of the lenders. The absence of financial maintenance covenants in a covenant lite loan might result in a lower recovery in the event of a default by the borrower. The Fund may experience losses or delays in enforcing its rights on its holdings of covenant lite loans. Debt Securities Risk: Debt securities in which the Fund invests are subject to several types of investment risk, including market or interest rate risk (i.e., the risk that their value will be inversely affected by fluctuations in the prevailing interest rates), credit risk (i.e., the risk that the issuer may be unable to make timely interest payments and repay the principal upon maturity), call or income risk, (i.e., the risk that certain debt securities with high interest rates will be prepaid or “called” by the issuer before they mature), and event risk (i.e., the risk that certain debt securities may suffer a substantial decline in credit quality and market value if the issuer restructures). Fixed income markets have recently experienced a period of relatively high volatility. If the Federal Reserve continues to increase interest rates, fixed income markets (and the high yield market in particular) could experience continuing high volatility, which could negatively impact the Fund’s performance. Distressed Investments Risk: The Fund’s investments in distressed companies may result in returns to the Fund, but which involve a substantial degree of risk. The Fund may lose its entire investment in a troubled company, may be required to accept cash or securities with a value less than the Fund’s investment and may be prohibited from exercising certain rights with respect to such investment. Troubled company investments may not show any returns for a considerable period of time. The Fund’s investments in companies involved in (or the target of) acquisition attempts or tender offers or companies involved in work-outs, liquidations, spin-offs, reorganizations, bankruptcies and similar transactions come with the risk that the transaction either will be unsuccessful, take considerable time or result in a distribution of cash or a new security, the value of which will be less than the purchase price to the Fund of the security, or other financial instrument in respect of which such distribution is received. Similarly, if an anticipated transaction does not in fact occur, the Fund may be required to sell its investment at a loss. Leveraged Loan Risk: Leveraged loans (also known as bank loans) are subject to the risks typically associated with debt securities. In addition, leveraged loans, which typically hold a senior position in the capital structure of a borrower, are subject to the risk that a court could subordinate such loans to presently existing or future indebtedness or take other action detrimental to the holders of leveraged loans. Leveraged loans are also subject to the risk that the value of the collateral, if any, securing a loan may decline, be insufficient to meet the obligations of the borrower, or be difficult to liquidate. Some leveraged loans are not as easily purchased or sold as publicly-traded securities and others are illiquid, which may make it more difficult for the Fund to value them or dispose of them at an acceptable price. In the event of fraud or misrepresentation, the Fund may not be protected under federal securities laws with respect to leveraged loans that may not be in the form of “securities.” The settlement period for some leveraged loans may be more than seven days. To the extent the extended loan settlement process gives rise to short- term liquidity needs, such as the need to satisfy redemption requests, the Fund may sell investments or temporarily borrow from banks or other lenders. Shareholder Concentration Risk: When a small number of shareholders account for a disproportionate share of the Fund’s assets, redemptions by large shareholders can harm remaining shareholders. If a large shareholder is an omnibus account that represents investments by multiple smaller accounts or if an adviser acts on behalf of multiple accounts, when the underlying accounts tend to act in tandem, shareholder concentration risk will be present. Risk is minimized when the underlying accounts tend to act independently of one another. Please see the prospectus for more details.

It is possible to lose money on an investment in the Fund. Investments in the Fund are not deposits or obligations of any bank, are not endorsed or guaranteed by any bank and are not insured or guaranteed by the U.S. government, the Federal Deposit Insurance Corporation, the Federal Reserve Board or any other government agency.

The Fund is distributed by ALPS Distributors, Inc. (ADI).